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Growing Opportunities: The Agricultural Chemical Security Credit

During
these depressed economic times, taxpayers are increasingly
confronted with issues related to cash flow management and the
need to reduce taxes. In many cases, taxpayers are looking at all
possible tax-saving opportunities. There is a little-known tax
credit opportunity that may bring additional benefit to taxpayers
that deal with fertilizers and pesticides.

General
Overview

In
2008, Congress enacted the Food, Conservation, and Energy Act of
2008, PL 110-234 (the Farm Bill), over President George W. Bush’s
veto. This act included the agricultural chemical security credit,
which is codified as IRC § 45O and is generally equal to 30% of
the costs incurred toward securing “specified agricultural
chemicals.” The credit includes specific limitations and overall
is capped at $2 million per taxpayer per year. As a general
business credit, it is reported on Form 3800, General
Business Credit, and also on Form 8931, Agricultural Chemical Security Credit.

Eligible
Taxpayers

Eligible
taxpayers include sole proprietorships, partnerships or
corporations in the trade or business of:

Selling
agricultural products, including specified agricultural
chemicals, at retail, predominately to farmers and ranchers;
or

In
general, specified agricultural chemicals include most fertilizers
and related hazardous chemicals that are commonly used within the
agricultural industry (section 45O(f)).

Taxpayers
that may benefit from this credit include:

Manufacturers
of fertilizers and pesticides;

Producers
of the component chemicals that are used by other parties in
the manufacture of fertilizers and pesticides;

Commercial
distributers of fertilizers and pesticides; and

Taxpayers
that aerially apply fertilizers and pesticides, such as
farmers and ranchers or those engaged to aerially apply the
chemicals to commercially raised livestock or commercially
grown crops.

The
broad nature of this provision suggests that it may apply to a
large spectrum of taxpayers and most likely applies from the point
at which the chemicals are produced to the point at which they are
applied by the farmer or rancher. In other words, there may be
opportunities to claim this credit at various points in the
chemical’s life cycle.

Calculating
the Credit

A
taxpayer may claim the tax credit on the first $333,333.33 of
qualified chemical security expenditures (per facility) that are
paid or incurred after May 22, 2008, but on or before December 31,
2012. The maximum amount of credit is limited to $100,000 per
facility (section 45O(b)(1)), and there is an annual credit
limitation of $2 million for each tax year (section 45O(c)).
Similar to the credit for research and development, the taxpayer
is also required to add back a Schedule M adjustment for the
portion of expenses that is equal to the amount of the credit
(section 280C(f)). For purposes of determining the amount of the
credit for any tax year, controlled group aggregation and
allocation rules similar to the rules governing research and
development credits must be applied (sections 45O(b) and (c)).

Examples
of qualified chemical security expenditures include:

Perimeter
security;

Measures
to control access to the facility and other restricted areas;

Identification
systems;

Lighting,
motion detectors and other related security systems;

Efforts
to deter theft and sabotage;

Security
training, exercises and drills;

Computer
network security; and

Background
checks for employees and visitors.

The
Facility Limitation

The
Code does not define the term “facility,” as used in section
45O(b), and there is no guidance from the Treasury Department or
the IRS. Regulations related to this Code section were not
included in the IRS’ 2009–2010 Priority Guidance Plan,
released Nov. 24, 2009. However, until the IRS publishes
regulations or provides further guidance, taxpayers should look to
analogous law. Specifically, the investment tax credit regulations
and production tax credit rules define each energy-producing
structure as a separate facility for purposes of computing the
available tax credit. By analogy, this same approach might be
applied to deem separate structures as separate facilities for
purposes of applying
the section 45O(b) facility limitation. Any analysis would need to
be performed on a case-by-case basis, and all facts and
circumstances would need to be weighed. The end result of a
careful analysis by the taxpayer may be that multiple facilities
exist within a particular site.

Example. Taxpayer
A is a manufacturer of fertilizers. A produces no
other chemicals. A sells the fertilizers to taxpayer
B. B sells the fertilizers to taxpayer C, who
is in the business of farming. During 2009, A performs an
analysis and determines that it has six facilities related to the
production of fertilizer. For each facility, A incurs
expenditures related to securing the fertilizer production
process. Based on this information, A would calculate the
credit as in the exhibit. A has a total credit before
limitation of $495,900. Because it does not exceed the $2 million
annual limitation, A is entitled to claim the entire
amount. In addition, since A did not meet the $100,000
cumulative credit per facility limit,
there may be an opportunity to claim a credit for qualified
expenditures for those facilities in future years (through Dec.
31, 2012).

Finally,
as noted earlier, A must add back the qualified
expenditures as an unfavorable Schedule M adjustment. The total
unfavorable adjustment is $495,900, which is the amount of
qualified expenditures that is equal to the credit. Although A
took the credit, the opportunity to take the credit may also
be available to B and C.

Facility
6: Warehouse, used to store the manufactured fertilizer product

Conclusion

Although
enacted in 2008, this credit remains unknown to many taxpayers.
Taxpayers that deal with fertilizers and pesticides should
consider their own facts and circumstances to determine how the
credit might apply.

Mas
Kuwana and Gary Hecimovich
are with Deloitte Tax LLP.

This
article originally appeared in the March 2010 issue ofThe Tax Adviser,
the AICPA’s monthly journal of tax planning, trends and
techniques. AICPA members can subscribe to
The Tax Adviser for a discounted price. Call 800-513-3037 or
e-mail taxsection@aicpa.org
for a subscription to the magazine or to become a member of the
Tax Section.